TED ROGERS SCHOOL OF BUSINESS

MANAGEMENT

GMS690 The North American Business Environment

 MODULE 2.1
GLOBAL TRADE AND TRADE THEORY
 Defining Globalization
• Globalization represents the global
integration of international trade,
investment, information technology and
cultures.
• World has become “One” Market
• Technology has enabled Globalization of
International Trade

Globalization is the word used to describe the growing

interdependence of the world’s economies, cultures, and
populations, brought about by cross-border trade in goods and
Peterson Institute for services, technology, and flows of investment, people, and
International Economics information. Countries have built economic partnerships to
views Globalization as: facilitate these movements over many centuries.
Source: https://www.piie.com/ Copyright 2020 Mark Viminitz
 Why Globalize?
• Five imperatives that drive
companies to globalize*:
1. Growth
2. Efficiency
3. Knowledge
4. Meet customer needs
5. Counter competition

*Source: Gupta, Govindarajan, and Wang (2008), p. 28. Copyright 2020 Mark Viminitz
Three Stages of Globalization
• The first Global Economy 1880-
1929
• The second Global Economy
1930-1979
• The third Global Economy 1970
– Present
• Politics played a significant role
in the waves presented in the
graph

POLITICAL IMPACT
1914 WWI – 1917 Russian Revolution – The Great Depression 1929
1939 WWII – 1940 China Communist Revolution
ISOLATIONISM - PROTECTIONISM

Source: http://www.atlas101.ca/pm/concepts/deglobalization/
Copyright 2020 Mark Viminitz
 Global Value Chain
• A global value chain
occurs when the
different segments
of their production
process are located in
different parts of the
world

Source: https ://www.oecd.org/industry/ind/global-value-chains.htm

Copyright 2020 Mark Viminitz
 Information Technology
• Information
Technology has
significantly impacted
the Globalization of
Trade
• Mobile Payments
• Block Chain
• 3D Printing (maybe)
• Trading via digital
platforms
• AI and Machine
learning

Source: https ://news.itu.int/5-technologies-changing-global-trade/

Copyright 2020 Mark Viminitz
 Emerging Economies
• The OECD has
identified Brazil,
Russia, India,
China, and South
Africa (BRICS)

China & India are often referred to as “Re-emerging” economies

• India in the 1800’s had larger manufacturing production than the UK
• China in the 1800’s had 50% of the world economy

Source: https://www.oecd.org Copyright 2020 Mark Viminitz

 Increasing Role of Government
• SOVEREIGN WEALTH
FUNDS
• Country owned
investments funds made
up of money generated by
the government

Source: https ://www.investopedia.com/terms/s/sovereign_wealth_fund.asp

Copyright 2020 Mark Viminitz
 Defining International Trade
• International trade is the exchange of
capital, goods, and services across
international borders or territories.
• In most countries, it represents a
significant share of gross domestic
product (GDP).
• GDP = Gross Domestic Product
• Measurement of economic output that
accounts for the
effects of inflation or deflation.
• Nominal = Price and Growth
• Real = Pure Growth
• While international trade has been
present throughout much of history, its
economic, social, and political
importance has been on the rise in
recent centuries.

Source: https://www.investopedia.com/insights/what-is-international-trade/
Copyright 2020 Mark Viminitz
 Defining International Trade
• Industrialization, advanced
transportation, globalization,
multinational corporations, and
outsourcing are all having a major
impact on the international trade
system.
• Increasing international trade is
crucial to the continuance of
globalization.
• Without international trade, nations
would be limited to the goods and
services produced within their own
borders.

Source: https ://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html

Copyright 2020 Mark Viminitz
 Defining International Trade
5 Levels of International Trade
1. Accidental Exporting
• Produce a product that is sold domestically and used in another product sold
internationally
2. Active Exporting
• Domestic manufacturer who sells to global markets
3. International Marketing
• Manufacturer who maintains administration in a domestic market and opens a sales
and marketing office in new country or a licensing agreement
4. International Production and Distribution in a Foreign Market
• Final assembly happens in foreign market and then sold in that market through a
distribution/warehouse facility
5. Foreign Direct Investment (FDI)
• Full copy of an organization in foreign country – characteristics of an MNE

Source: https ://www.oecd-ilibrary.org/finance-and-investment/foreign-direct-investment-fdi/indicator-group/english_9a523b18-en Copyright 2020 Mark Viminitz

Types of International Trade
3 Types of International Trade
1. Export Trade
• Sending goods or services across
national borders for the purpose of
selling and realizing foreign exchange
2. Import Trade
• Products of foreign origin brought into a
country
3. Entrepot Trade
• Trade in which imported goods are RE-
EXPORTED with or without any
additional processing or repackaging

Source: https://efinancemanagement.com/international-financial-management/international-
trade#:~:text=There%20are%20three%20types%20of,Import%20Trade%20and%20Entrepot%20Trade .
Copyright 2020 Mark Viminitz
 Free Trade Theory
• Trade Theory tries to explain
several facts about trade.
• In its purest form governments
impose absolutely NO tariffs,
taxes, or duties on imports, or
quotas on exports.
• It shows why it is beneficial for a
country to engage in
international trade even for
products it is able to produce
itself.
• Trade Theory is divided between https://www.youtube.com/watch?v=J-qGCZ4wmxs
Classical and Modern.

Source: https ://www.exploring-economics.org/en/discover/free-trade-economic-theories/

Copyright 2020 Mark Viminitz
 Trade Theories https://www.youtube.com/watch?v=5ITyd1Pzek0

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz

 Trade Theories
• Exchange of raw materials and
manufactured goods and services
across national borders
• Classical Trade Theories –
explain national economy
conditions – that enable such
exchange to happen
• New Trade Theories - explain
links among natural country
advantages, government action,
and industry characteristics that
enable such exchange to happen

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz

Trade Theories 300 Years
Mercantilism
• Theory stated that a countries
wealth was determined by the
amount of gold and silver holdings
• Meaning if people in other
countries buy more from you
(Export) than they sell to you
(Import), then they have to pay you
the difference in gold and silver
• The objective was to have a Trade
Surplus
• Protectionism was a strategy
where nations would impose
restrictions on imports

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz

 Trade Theories – NEO-Mercantilism
• An economic theory that maximizes the benefits to
and interests of a country such as Neomercantilism, to
use the definition
• higher prices for goods traded abroad, found in the Merriam-
• price stability, Webster dictionary, is a
• stability of supply, and revived theory of
mercantilism
• expansion of exports with reduction of imports. emphasizing trade
• It promotes exports, deters imports, and controls restrictions and
capital movement. commercial policies as
means of increasing
• It is the 21 stcentury update of Mercantilism domestic income and
• Neomercantilism grew out of WWII (China and Russia) employment.

How does Trump policies support Neomercantilism?

Source: https://wernerantweiler.ca/blog.php?item=2018-06-25
Copyright 2020 Mark Viminitz
 Trade Theories – Absolute Advantage
Adam Smith - Scottish philosopher and economist
• Wealth of Nations 1776 considered one of the
most influential books ever written
• Transitioned away from the theory of Mercantilism
• Argued that in free exchange, both sides became
better off
• Both buyer and seller profits. Imports are just as
valuable as exports
• Trade benefits both sides a nations wealth is not
the quantity of gold and silver in its vaults, but the
total of its production and commerce
• The basis of Gross National Product - GNP
GNP and GDP both reflect the national output and income of an economy. The main difference is
that GNP (Gross National Product) takes into account net income receipts from abroad.

Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Absolute Advantage
• Theory focuses on a countries
ability to produce a good more
efficiently than other nations
• Trade should not be regulated
or restricted by government
policy or intervention
• Trade would flow naturally
according to market forces
• Production becomes more
efficient

Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Scenario:
If there was NO trade

Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories

Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Scenario:
Each country specializes

Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories

Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Conclusion:
Total Trade Increases

Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
 Trade Theories
Absolute Advantage
• Exercises
• Who has Absolute
Advantage

https://www.youtube.com/watch?v=-7co04C8l-c

Source: https://www.economicshelp.org/blog/glossary/absolute-advantage/
Copyright 2020 Mark Viminitz
Trade Theories
Absolute Advantage
• Underlying Assumptions
• Factors of Production
cannot move between
countries
• No Trade barriers
• Assumes exports =
imports
• No economies of scale

Source: https://www.intelligenteconomist.com/absolute-advantage/
Copyright 2020 Mark Viminitz
 Trade Theories
• Factor Mobility refers to the ability to move factors of production -
labor, capital or land - out of one production process into another.
• Factor mobility may involve the movement of factors between firms
within an industry.
• When one steel plant closes but sells its production equipment to another steel
firm.
• Mobility may involve the movement of factors across industries within
a country
• When a worker leaves employment at a textile firm and begins work at a
automobile factory.
• Finally mobility may involve the movement of factors between
countries either within industries or across industries.
• When a farm worker migrates to another country or when a factory is moved
abroad.

Source: https://saylordotorg.github.io/text_international-trade-theory-and-policy/s07-factor-mobility-and-income-red.html Copyright 2020 Mark Viminitz

 Trade Theories
Factors of Production
• Used to describe the inputs used in
the production of goods or services
in order to make an economic profit.
• The factors include:
• Land
• Labor
• Capital
• Entrepreneurship

Source: https://www.toppr.com/guides/business-economics-cs/theory-of-consumer-behavior/factors-of-production/ Copyright 2020 Mark Viminitz

Trade Theories
Comparative Advantage
David Ricardo 1815 British political economist
• Free trade is advantageous as it allows
nations to specialize in production that
requires relatively fewer factor inputs
• The ability of an individual or group to carry
out a particular activity more efficiently than
another activity.
• Fundamental tenet is that everyone mutually
benefits from cooperation and voluntary
trade.
• Opportunity cost is the potential benefit that
someone loses out on when selecting a https://www.youtube.com/watch?v=ol4NexZ0iII
particular option over the other!

Source: https://study.com/academy/lesson/comparative-advantaged-definition-and-examples.html Copyright 2020 Mark Viminitz

Trade Theories
Comparative Advantage
• Theory introduced in 1817 by
David Ricardo
• If a country has an Absolute
Advantage in the production of
both products, specialization
could still occur between the
countries
• Relative productivity vs.
Absolute productivity

Source: https ://economics.mit.edu/files/7536 Copyright 2020 Mark Viminitz

TRADE THEORIES
Scenario:
• Sheep

Source: https ://economics.mit.edu/files/7536 Copyright 2020 Mark Viminitz

TRADE THEORIES
Scenario:
• Tropical Fruit

Source: https ://economics.mit.edu/files/7536 Copyright 2020 Mark Viminitz

TRADE THEORIES
Conclusion:
• Trading is still
advantageous

Source: https ://economics.mit.edu/files/7536 Copyright 2020 Mark Viminitz

Trade Theories

Source: https ://economics.mit.edu/files/7536 Copyright 2020 Mark Viminitz

Absolute vs. Comparative Advantage
• Absolute Advantage (Factors) • Comparative Advantage (Opportunity)

Source: https://quickonomics.com/comparative-advantage-and-trade/ Copyright 2020 Mark Viminitz

Trade Theories
Heckscher-Ohlin Theory – 1933 Swedish
Economists
• The Hecksher-Ohlin Model explains
mathematically how a country should operate
and trade when resources are imbalanced
throughout the world. Comparative Advantage
• Proposes that countries export what they most
efficiently and plentifully produce. (factor
endowments)
• It professes that countries should ideally export
materials and resources of which they have an
excess, while proportionately importing those
resources they need

https://www.youtube.com/watch?v=ZbOHzKMjsDI

Source: https://www.investopedia.com/terms/h/heckscherohlin-model.asp Copyright 2020 Mark Viminitz

Trade Theories
Leontief Paradox
• Developed by Wassily Leontif in 1950’s Nobel Prize
winning Russian-American economist
• Input-Output Analysis – developed input-output
tables that estimated the impact a change in
production of a good has on other industries and
their input
• The paradox studies trade flows and discovered
that in the US, a country with a great deal of
capital, was importing capital intensive
commodities and exporting labor intensive
commodities.
• Contrasts with the Hecksher-Ohlin theory

Source: https://www.economicsdiscussion.net/theories/leontief-paradox-theory-an-overview/6563 Copyright 2020 Mark Viminitz

 Trade Theories
• New Trade Theory
• Developed in the 1970’s by Paul Krugman
tries to explain why countries are trade
partners when they are trading similar goods
and services.
• The theory argues that using protectionist
measures to build up a huge industrial
base in certain industries will then allow
those sectors to dominate the world
market!
• Network effects
• Economies of Scale

https://www.youtube.com/watch?v=L5HlR07nt8g

Source: https://www.economicshelp.org/blog/6957/trade/new-trade-theory/ Copyright 2020 Mark Viminitz

 Trade Theories
New Trade Theory
• Economies of Scale

Source: https://www.intelligenteconomist.com/economies-of-scale/
Copyright 2020 Mark Viminitz
 Trade Theories
New Trade Theory
• Returns or Economies
to Scale
• Decreases Avg. Costs
• Secures more Markets
• Monopolistic
• Creates Barriers to Entry
• Profitability
• FDI Advantage
• Protectionist Advantage
building huge industrial
base to dominate markets

Source: https://www.intelligenteconomist.com/economies-of-scale/
Copyright 2020 Mark Viminitz
 Trade Theories
Product Life Cycle Theory
• Explains the various stages
that a product goes through
after it enters the market. Raymond Vernon

• Four stages
1. Introduction Phase –
characterized by investment
and low profits
2. Growth Phase – rapid adoption,
decrease in costs, and high
profits
3. Maturity Phase – competition,
lower prices less profits
4. Decline Phase – saturated
market, low investment

Source: https://www.ukessays.com/essays/marketing/product-life-cycle-theory-marketing-essay.php Copyright 2020 Mark Viminitz

Trade Theories
• Country Similarity Theory
• Explains the concept of intra-industry
trade
• The theory proposes that consumers
in countries that are in the same or
similar stage of development would
have similar preferences
• Companies look for markets similar to
their domestic ones
• Explains international trade on the basis
of demand
Steffan Linder
• Brand names and product reputations
are important factors in buyers’
decision-making process

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html
Copyright 2020 Mark Viminitz
Trade Theories
Global Strategic Rivalry
Theory
• MNC’s efforts to gain a
competitive advantage
against other global firms in Paul Krugman
their industry
• Creation of “barriers to entry”
(R&D, IP, economies of scale,
processes, control of
resources) Kevin Lancaster
• Development of Strategic
Alliances
• Mergers and Acquisitions

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz

 Trade Theories
Porter’s National Competitive
Advantage Theory
• A countries competitiveness in an
industry depends on the capacity
to innovate and upgrade.
• Four determinants are:
• Local market resource and
capabilities
• Local market demand conditions
• Local suppliers and complementary
industries
• Local firm characteristics

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz

 Trade Theories https://www.youtube.com/watch?v=T9ALTVXawNk

Porter’s National Competitive Advantage Theory

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz

 Trade Theories
Porter’s National Competitive
Advantage Theory
• FOUR FACTORS/CONDITIONS:
1. FACTOR CONDITONS
• Refers to the natural, capital and
human resources
2. DEMAND CONDITIONS
• Size of Domestic Market
3. FIRM STRATEGY, STRUCTURE AND
RIVALRY
• Company strategies, Organization
structure, intensity of competition
4. RELATED AND SUPPORTING
INDUSTRIES
• Companies are dependent on alliances
and partnerships with other companies
in order to create value for customers
and to be more competitive
Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz
 Trade Theories
Porter’s National Competitive Advantage Theory
• FIVE FORCES of Porter’s Model:
• Competition in the Industry
• Refers to the number of competitors and their ability to undercut the competition
• Competitive rivalry
• Potential of New Entrants into an Industry
• Barriers to enter markets
• Power of Suppliers
• Ability of suppliers to drive up the cost of inputs
• Power of Customers
• Power is dependant on how many customers a company has
• Smaller, powerful customer base means more ability to negotiate lower prices
• Threat of Substitutes
• Companies that produce goods or services with little close substitutes will have
power to increase price.
• Ease of switching

Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html Copyright 2020 Mark Viminitz

Trade Investments
PORTFOLIO INVESTMENT
• Refers to investment in a
company’s stocks, bonds, or
assets
• Not to control or direct the
firms operation or
management
• Looking for a financial rate of
return

Source: https ://www.investopedia.com/ask/answers/060115/what-difference-between-foreign-portfolio-investment-and-foreign-direct-

investment.asp#:~:text=Foreign%20portfolio%20investment%20(FPI)%20refers,global%20depositary%20receipts%20(GDRs ). Copyright 2020 Mark Viminitz
Trade Investments
FOREIGN DIRECT INVESTMENT
(FDI)
• Refers to an investment in or the
acquisition of foreign assets with
the purpose or intent of controlling
and managing them.
• FDI can be both inward and
outward
• Forms of FDI include:
• Horizontal FDI
• Vertical FDI
• Greenfield/Brownfield FDI

Source: https ://www.investopedia.com/ask/answers/060115/what-difference-between-foreign-portfolio-investment-and-foreign-direct-

investment.asp#:~:text=Foreign%20portfolio%20investment%20(FPI)%20refers,global%20depositary%20receipts%20(GDRs ). Copyright 2020 Mark Viminitz